The two major payroll processing companies in the United States, Automatic Data Processing (NASDAQ:ADP) and Paychex, Inc. (NASDAQ:PAYX), are favorites of many income investors. Both companies provide a critical service that nearly all companies need, and they pay their investors solid dividends.
However, the painfully slow recovery in the U.S. labor market has served as an anchor on growth for both these companies, and Paychex, Inc. (NASDAQ:PAYX)’s fourth quarter earnings report landed on the market with a thud. What’s an investor to think of these stocks in light of recent events?
Ideal for income investors…
Income investors are understandably hungry for yield, since interest rates are near historic lows in an attempt to juice the slow-growing economy. Because of that, it’s reasonable to consider securing the dividends offered by Automatic Data Processing (NASDAQ:ADP) and Paychex.
Moreover, ADP’s financial position is strong, thanks to a very healthy balance sheet. ADP remains one of only four non-financial U.S. companies rated AAA by both leading credit rating agencies. In addition, the company is clearly committed to rewarding shareholders. In 2012, Automatic Data Processing (NASDAQ:ADP) increased its dividend 10%, raising its distribution for the 38th year in a row. ADP also bought back nearly $750 million in stock last year.
Paychex, Inc. (NASDAQ:PAYX) actually does its investors even better, with a higher dividend yield than its closest peer. At recent prices, Paychex yielded more than 3.5%.
…but not so much for growth investors
Unfortunately, the payroll processing business simply isn’t growing to a satisfactory degree, and the lack of growth is starting to impact investors.
For example, despite Paychex, Inc. (NASDAQ:PAYX)’s hefty dividend yield, the company hasn’t grown its dividend by much over the past several years. After not raising its dividend for three years, Paychex’s last two dividend raises have been in the amount of one penny per share.
The lack of growth was evident in the company’s recently released fourth quarter and full-year results. Fourth quarter revenue and profit both missed analyst expectations, sending the stock down more than 5% on a day in which the broader market rallied.
In all, revenue rose 6% in the quarter and 5% for the entire year. Diluted earnings per share, meanwhile, was flat in the quarter and up 3% in the fiscal year.